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Best Practices: Enhancing Disclosure on Environmental Quality Management
Due to limited or ineffective disclosure, we find companies are often penalized and perceived as “non-investable” by many Sustainable or ESG-focused funds. One recommendation that we have made in the past is to enhance corporate disclosure by relative peer benchmarking.
One case study we would highlight is in the energy industry where life cycle assessment has clear implications to the environmental quality. We would recommend energy companies to follow Tullow’s disclosure of development plans which details environmental quality management. A good example is the Environmental Impact Statement for the Jubilee Field in Ghana that details environmental regulations, health and safety protocols.
Nissan Motors: Governance Scandal
In November 2018, Nissan removed Carlos Ghosn as Chairman due to allegations of misconduct. Specifically, Ghosn was charged with:
· allegedly under-stating personal income to minimize tax liabilities: Ghosn’s actual remuneration of about 9.998BN, of which only 4.987BN was reported
· allegedly using company investment funds for private purposes: Expensive homes that Ghosn has used in such areas as Beirut and Rio de Janeiro were purchased through an overseas subsidiary of Nissan. Specifically, the article on Reuters cited Ghosn’s residences were paid through a Nissan entity in the Netherlands called Zi-A Capital BV and its subsidiaries. The objective of Zi-A was to invest in emerging technologies.
On the surface, Nissan “checks the box” for sustainability with substantial disclosure and key performance indicators (277 pages CSR as of July 2018). Additionally, the company is part of the United Nations Global Compact.
However there were key corporate governance best practices that warrant further scrutiny:
1) Lack of Independent Compensation Committee
One guideline Nissan chose not to adopt was setting up independent advisory committees on executive pay. The omission gave Ghosn broad power to decide how much he was paid. It also allowed him to determine the compensation of the people who were supposed to keep him in check.
Nissan’s Corporate Governance Report states that “the Chairman of the board determines the compensation of each director’’ based on consultation with the company’s two other top officials (one of whom was Greg Kelly, who was arrested along with Ghosn).
2) Lack of Fully Independent Statutory Auditors: from Nissan’s disclosure, Statutory Auditors (3, all appointed) receive regular reports on the audit plan and the results of audits from Ernst & Young ShinNihon LLC, the Company’s independent auditors.
o Motoo Nagai - the Company has a significant business relationship
o Tetsunobu Ikeda - Company has a business relationship
3) Lack of Independent Board (Majority)
Only 3 Independent directors were put in place after the inspection-related recall scandal in 2017. The Board comprised of
o Masakazu Toyoda - retired government bureaucrat
o Keiko Ihara - ex-race-car driver race car driver
o Jean-Baptiste Duzan (Renault)
4) Excessive Compensation
As we conduct further deep dive research on the Ghosn scandal at Nissan, new headlines emerge on seemingly excessive compensation payments. The Journal reported over the weekend that Ghosn had allegedly signed a contract with a Dutch entity granting him a $1.7 million signing bonus and salary of $6.7 million for the year through March 2019.[2]
Source: https://www.nissan-global.com/EN/DOCUMENT/PDF/GOVERNANCE/g_report.pdf
[1] https://www.nissan-global.com/EN/DOCUMENT/PDF/SR/2018/SR18_E_All.pdf
Improper Payments and Abuse of Fiscal Authority
Further investigations also uncovered what was deemed to be improper payments to a Middle Eastern businessman, Khaled al-Juffali between 2009 - 2012. Ghosn had defended the payments to Juffali's company citing "critical services that substantially benefited Nissan." However, Al-Juffali and Ghosn appeared to have prior personal dealings.
· Prosecutors claimed that Ghosn transferred financial contracts, with marked-to-market losses of about $16 million, to Nissan in 2008 by securing bank guarantees with the businessman's help. The alleged intention of this structured transaction was to allow Ghosn to reclaim these contracts in the future.
· Ghosn said that Nissan had incurred no losses from the currency contracts, and that payments to the Khaled Juffali Company were properly approved in exchange for services such as helping Nissan solicit financing and resolve problems with distributors in the Gulf that allowed the company to compete better with Toyota (TM) and other rivals.